Einstein Noah Concerns Overdone
Einstein Noah Restaurant Group Inc. (BAGL - Snapshot Report), based in Lakewood, Colorado, is suffering the effects of constrained consumer spending, reporting its first quarter of negative comps in four years. We expect comps [comparable store sales] to remain negative and weigh on earnings into the second half of 2009 or longer, depending on the economy.
Longer term, however, we think Einstein Noah is positioned to increase EPS at low-teens CAGR [compound annual growth rate] over the next several years, while boosting ROIC [return on invested capital] from mid-single digits, through 2.5% to 3.5% +comps and 10% unit growth, heavily weighted towards franchises. The company has culled under-performing units from its system roughly 45% of the system and a more profitable unit base remains.
The stock price has fallen more than the overall market, in part due to concerns about Einstein Noah's leverage and its ability to meet a preferred stock maturity in 2009. However, we think these concerns are overblown as the company is building cash reserves and generating increasing free cash flow on declining cap ex [capital expenditure] requirements, despite declining comps.